It can be tempting to bring in someone from outside, but a newbie without a deep knowledge of the quirks of your organization will struggle in the role.

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Last month, Steve Jobs handed the Apple reins back to his second-in-command, Tim Cook.

Likewise, Mark Zuckerberg has Sheryl Sandberg on staff to provide some adult supervision at Facebook.

Even for a five person business, a second-in-command can balance the demands of running your company; a 2iC who has been clearly anointed can go a long way toward making you redundant, which should be the objective of anyone wanting to build a company that can one day be sold.

But how do you pick a second-in-command? For help, I turned to Silicon Valley–based Bob Sutton. Sutton is a Stanford professor and the author of the books Good Boss, Bad Boss: How to Be the Best . . . and Learn from the Worst and The No Asshole Rule: Building a Civilized Workplace and Surviving One That Isn't.

Based on my conversation with Sutton, here is a five-step plan for hiring your second-in-command:

Step 1: Identify Someone Internally

"The research is clear," says Sutton. "Unless things are totally screwed up, internal candidates have a strong tendency to outperform external leaders." According to Sutton, although it can be tempting to bring in someone from outside, a newbie without a deep knowledge of the quirks of your organization will struggle in the role.

Step 2: Give the 2iC Prospects a Special Project

Sutton suggests giving each of your second-in-command prospects a special project that allows them to demonstrate their leadership skills to you and the rest of your team—a test that can serve as a great audition. If your candidate(s) shrivel under the pressure of leading, you know you have the wrong person/people in mind and can be glad you didn't just hand over the reins. On the other hand, if one of them thrives, you'll be able to justify to yourself—and your team—why he or she was selected above others.

Step 3: Use the "Hit-By-a-Bus" Conversation Starter

Once you have selected a candidate, it's time to communicate your choice to the rest of your team. In a small, tight-knit business, picking one person to rise above his or her peers can disrupt the delicate balance of chemistry and egos that keep a small business going. Sutton recommends you start the conversation by asking your senior team to imagine a scenario in which—as morbid as it sounds—you get hit by a bus. Explain who you would want leading the team and why.

Step 4: Wrap Your Arms Around the Losers

Once you pick a second-in-command from an internal pool, the people who were passed over for the job will likely feel slighted. "It's human nature to hide from the people who you didn't pick," Sutton says, "but it's exactly the wrong thing to do." Instead, he recommends you go out of your way to spend time with those you passed over to make it clear how much you value their contributions.

Step 5: Shift from Manager to Coach

Strapped for cash in the early days, many business owners hire doers, not leaders, so they start out as managers learning a command-and-control style of leadership. That may have served them well in the early days, but according to Sutton, with a second-in-command in place, you need to shift your style: "The transition from manager to coach is a gradual evolution where the goal of the coach should be to ask more questions and spend more time listening and less time talking and directing."